The Kapali Carsi

Who will help Turkey out (of Junk): S&P, Moody’s or Mayans?

I was planning to do guest columns once and actually had a guest blogger for a while. As a fellow blogger, I know that the hardest part of blogging is to commit, and so when Ali G. (not the rapper) stopped blogging, I wasn’t surprised at all. While I would happily welcome him back anytime, I have new guest blogger. I’ll leave the floor to Erdem, who bears the same name as our beloved Central Bank Governor, but before I do, a couple of announcements: 

First, please note that I am always looking for guest bloggers to share their thoughts on the Turkish economy. The only requirement is to have a decent knowledge of the two “E”s, Economics and English.

Second, please note that I had a weird problem with Erdem’s graphs: When I attached them, the column disappeared- I got an empty post in preview as well as in the actual post- I had to actually post and delete it a couple of time. I solved the problem by providing links to the graphs using Sugarsync. Sorry for the inconvenience.

Anyway, here’s Erdem:

In this article, I argue that there is a high probability that Turkey will receive an upgrade from S&P or Moody’s, therefore achieve a “real” investment grade status “if” the CDS spreads for 5 year Turkish Government Bonds (currently 1.27%) fall below 110 basis points (1.1%). However, we will not have to worry about this so much if the world comes to an end on 21/12/2012 as the Mayans suggest, will we? Or how about Turkey receiving a second investment grade rating on the doom’s day? This would be even more fun. Maybe we should ask Dr. Doom about the Doom’s day. Okay, enough jokes about the Mayans and the doom’s day, let’s focus on the original content.


Fitch Ratings recently (November 6, 2012) upgraded Turkey’s long-term foreign currency credit rating to Investment Grade, “BBB-“, which is great news. Receiving an investment grade rating from an internationally recognized rating agency is good news because various large US or Europe based funds are often restricted (by law) to invest only in investment grade bonds (BBB- or higher). The assumption is that there will be a higher demand for Turkish government bonds and this will lower the yields (currently about 6.8% for a 2-year government bond), helping the Turkish government borrow at lower rates. Below is a complete history of ratings assigned to Turkey by the three major agencies over the last 20 years.


Source: European Central Bank, Bloomberg

However, according to global regulations, the bonds should be rated investment grade by “at least 2 agencies” in order to receive investments from large pension or mutual funds. Let me remind also that Moody’s reiterated (on November 20, 2012) that they will keep Turkey at BB+ level (Ba1 in Moody’s’ scale), and S&P has not made any announcements lately.

This prompts us to ask ourselves: “When will S&P or Moody’s follow Fitch on this upgrade?” There is no doubt that Turkey will receive the investment grade status in the near future, but the “timing” is cash. To be able to answer this question, let’s take a look at the table below. This is a small sample of the emerging market economies in G-20, and the dates of their “big jumps” out of junk status.


Source: Wall Street Journal, PR Newswire, Reuters, and various news sources

In general, the rule of thumb is that all “big three agencies” should grant the investment grade in order the markets to feel confident in an emerging market economy. The opinions of S&P and Moody’s are usually weighed more by the authorities. Let’s focus on 2 recently upgraded emerging markets; Brazil and Indonesia, and call this “technical analysis”. According the table above, it is highly likely that Turkey will receive an investment grade status rating in December of 2012 or in January of 2013. However, looking at Mexico or Russia, we might also see a one or two year delay. I argue that if the global conditions deteriorate and political risks increase, a long delay like this is possible, otherwise Turkey should receive a second investment grade status from Moody’s or S&P very soon.


We have to keep in mind that Turkey carries a lot of political risk, domestic as well as international risks unlike Indonesia or Brazil. Economically speaking, although government finances look solid, European Crisis and Global Slowdown might also have major impacts on the economy. Let’s call this “fundamental analysis”.

Recent literature on sovereign risk[1] suggest that the risk level of an emerging market (proxied by CDS spreads) depend on its own dynamics only 36% of the time. In other words, country-specific risks depend more on global factors such as the US Stock Market or global bond yields (64% of the time) and less of a country’s own local factors. So if the U.S., Europe, and/or China sneeze, there is a 64% chance that Turkey will get sick (don’t worry if you did not get the joke, this is a common Turkish Slang).

Another important factor (both a political and an economic weapon) is the strength of the domestic currency. Are we confident that the Turkish lira will not drop more than 10% within the next couple of months? As of the end of 2011, Debt/GDP ratio for Turkey is around 44%, however a 10% drop in exchange rate might as well make it 50%, a 20% or more drop in currency might take it to a 60% level in a couple of days!

Therefore, the volatility and the strength of the local currency is a crucial aspect for an emerging market economy to achieve a stable, comparably safe, level of risk. A related proxy is called “original sin”, which is the non-ability of an emerging market economy to issue debt in its local currency. This is considered as a “sin” because borrowing with other people’s currency (USD, EUR) rather than your own currency (Lira) is considered as a “bad behavior”. In this respect, Turkey is in the same bracket as Mexico or Indonesia, but far below that of Brazil or China.

Domestic Debt, %GDP                                 External Debt, %GDP

Brazil                                       66%                                                     5%

China                                       18%                                                     2%

Indonesia                                  16%                                                     12%

India                                        70%                                                     5%

Mexico                                     35%                                                     12%

Turkey                                     33%                                                     11%

Source: Ugo Panizza (2012), UNCTAD, Public Debt around the World


Will Turkey receive an upgrade from Moody’s or S&P in late December 2012 or in early January 2013? Technicals suggest that there is a high probability of receiving a second upgrade within a month or two. Fundamentals and [Emre Deliveli in one of his latest columns: Turkey’s Hidden Risks in 2013], however, point to two (or more) major risks. First is the political risk, not only evolving around Syria and Iran, but also growing social unrest within the country. Second is the global slowdown, namely European Sovereign Debt Crisis and worrisome growth figures of China and the US. I argue that if the Credit Default Swaps (CDS) for 5 Year Turkish Bonds fall below 110 basis points (1.1%), then Turkey will receive an upgrade from S&P or Moody’s that month. Currently (as of December 7, 2012), 5 year Turkish CDS spreads are around 127 basis points (down from 237 basis points back in June 2012), whereas Brazil is 108, Mexico is 98, and Indonesia is about 166 basis points (Deutsche Bank Research). If the global conditions deteriorate further and political risks increase in early 2013, the expected upgrade could be delayed for a year or two (assuming that the world does not end by then).

Erdem Aktug is an Assistant Professor of Finance at the Richard Stockton College of New Jersey, USA. Dr. Aktug received his Ph.D. in Economics from Lehigh University – Pennsylvania and his Bachelors in Management from Bogazici University – Istanbul. His research on credit risk and financial markets appeared in various economics and finance conferences, and in various business journals. He was born in Canakkale-Turkey, also known as the famous city of Troy in history, and he currently resides in Atlantic City, USA.

[1]Longstaff et al. (2011). How Sovereign is Sovereign Risk? American Economic Journal: Macroeconomics, 3(2): 75-103.

6 Responses to “Who will help Turkey out (of Junk): S&P, Moody’s or Mayans?”

recepyakarDecember 20th, 2012 at 9:31 pm

Hi there,

My single comment for E.Aktug's belief on a possible rating upgrade very soon (say in Dec 12) is; if it had been so, CBT would have cut the lower end of the corridor, doubtless. Remind what they did be4 Fitch action, in the treasury auction.



Erdem AktugDecember 20th, 2012 at 9:52 pm

Thanks for your comment. I think the question is who will know the next rating action first, the Wall Street or CBT? Cheers!


Emre Deliveli edeliveliDecember 21st, 2012 at 6:52 am

Good point. I agree with you. In any case, no one does business in the second week of December anyway. But 2013 is another case….

Julie FisherSeptember 4th, 2013 at 12:37 pm

Must be tough work monitoring the economy of other countries. So many external factors to take into consideration. Who would have predicted this situation in Syria 5 years ago? 10 years ago? But yet it all makes a difference